Case Study: Contract Negotiation with Chinese Client

Introduction

AVIC SAC Commercial Aircraft Company Limited (hereinafter referred to as "SACC") is a global provider of aerostructures. With proven expertise, SACC is focused on design, manufacture, test and after-sale service of commercial aircraft and associated parts and components. The organizational structure is shown below. (SACC website)

AVIC SAC is an important domestic client of SACC, which focused on design, manufacture, test and after-sale service of military aircraft and associated parts and components. Historically, SACC was derived from SAC and SAC is still one of the holding companies of SACC.

Figure : Organization structure of SACC

Source: (https://www.sacc.com.cn/en/)

Challenge

To get better control and reduce risks in contract, SACC introduced a digital contract review and approve process, in which the project manager responsible, law expert in Business Development Department and financial expert in Financial Management department were involved.

In 2019, I was working as project manager in engineering Research and Development Division in SACC. I was in charge of a project with SAC. SACC is the service provider and SAC is the client.

During the contract review and approve progress, I checked the technical part and confirmed to the SAC manager. Then SACC law expert found that the default clause is not fair to either side. The fine to SACC due to delay of delivery is crucial. As I negotiate with the SAC manager, he agreed with the opinion. However, I felt his reluctance in contract modification. He disagreed to change the default clause since both companies has a long history of cooperation and the default clause is seldom triggered.

Actions to solve the conflict

I agree that the two companies have strong relationship, but I believe even the never triggered default clause violate the principle of fairness. I decided to dig deeper to see the obstacle. After discussion, I understood that he has already delivered the contract to his boss and the contract is signed on their side. He didn’t want to return to his boss’s office and explain the modification. I explained him that it was my fault to confirm the contract arbitrarily without the permission of law expert. I must comply with the contract review process and ask for his help to deal with issues and move forward into the project. Finally, he agreed to change the contract.

Analysis

Stakeholders

SAC and SACC: They have strong partnership and long history of cooperation. SAC is considered to hold a more powerful status than its suppliers. When there are conflicts between SAC and the suppliers (especially SME), SAC may have the power to compel the decision to the consciously or unconsciously. In this case, one of us will have to compromise. In a large power distance culture, the more powerful manager is more likely to utilize the compel style to negotiate.

The SAC frontline manager: In Chinese big companies, there is always strong vertical hierarchy system. The frontline manager may have the autonomy to negotiate issues and implement the project. The subordinates face a lot of pressure to take the responsibility of making mistake. They are afraid to be considered less competence or careless.

Stakeholder’s interpretation of contract form

In the former case, SACC present the individual culture in the contract negotiation process. SACC tried to be clear on penalty clauses even it has little possibility to happen, which shows a serious attitude on every word in the contract. This provides more certainty in scope of the project. The challenge is to convince that this is not personal with the partner, but due to a process change that applies to all contract. SACC needs to more certainty in contract while at the same time maintaining the strong long-term relationship with SAC.

Solutions

In this case, I explained to him about the SACC’s process of contract control. It is a universal requirement for each partner to provide more accuracy in contract management. It will avoid future conflicts due to chaotic contract. Personally, I believed the default clause cannot be triggered, and I will do whatever I can to avoid that situation. I also promised to make sure of the project quality with all my effort and do whatever he asks within the frame of contract.

I recognized that he was facing pressure from his boss and I hope he will feel easier to hear that I would like to take the responsibility. So, I apologized to him and admitted that it was my fault to deliver the contract confirm message arbitrarily too early without the permission of law expert. We needed to corporate to find a way proceed in the contract review process.

Result

The goal of stakeholder management is to get a productive working relationship with stakeholders throughout the project, stakeholder agreement with project objectives and stakeholders who are project beneficiaries are supportive and satisfied while stakeholders who may oppose the project or its deliverables do not negatively impact project outcomes.

All the outcome had been obtained in this case. The contract was signed with all stakeholder satisfied, including SAC manager, SACC law expert and SACC project team. For the project implement, we successfully accomplished the project within the cost, time and quality requirements. After this project, we signed the supplementary agreement and had further corporation. This shows that the long-term partnership between two companies was strengthen.

Discussion

Stakeholder communication in High Power Distance Culture

In large power-distance culture such as China, it is difficult to hear the voice expressing the real need or bad news from the weaker side. It is even harder for the weak side to insist their idea when facing a conflict with the strong side. For the powerful side, it is important to not judge or blame who bring bad news or different idea. The weak needs more courage to take responsibility and stick to the point in an objective and reasonable way.

It is important not to make negative assumption to the motivation of each other. For example, in this case, I shouldn’t consider the manager refuse me out of arrogant. Instead, I should be open to sense his concern and help find a solution.

Contract negotiation between Individualism and Collectivism Culture

In China, there is a strong emphasis on relationships. Deals tend to depend heavily on the relationship between the parties involved; social gatherings are common during the negotiation process.

The Chinese focus on building relationships rather than on contracts tends to prolong the negotiation process. Sometimes the project begins before the deal of scope and contract amount between two long-term relationship company.

On the contrary, weighty contracts are a way of life in individual cultures. A contract serves to record an agreement on principle and codifies what the respective parties have promised to. It also implies consent to the agreement and provides recourse if either party does not keep to its side of deal. Introducing law expert into the process of negotiation puts the parties on notice that any breach could be costly and that promises made initially must be kept, even if they prove inconvenient.

The challenge is how Chinese partner perceive a legal contract like this. If the Western introduce contracts with strict requirements and penalty clauses, the implied message is that one party would cheat the other if not legally restrained from doing so. Some Chinese may feel not trusted or terminate the relationship with a western partner. The Chinese may try to make the contract as vague as possible and may object to clauses that are restrictive.

Good communication and explaination about motivation are extimely important in the contract negotiation in different culture. Remind yourself that the real conflict is in the different interpretation of fact instead of in the fact itself. The case emphasizing the delicate balance between maintaining a long-standing partnership and adhering to fair contractual practices. The stakeholder analysis underscores the power dynamics inherent in client relationship, shedding light on the necessity for cultural sensitivity in negotiations.